Installed Building Products, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial amounts below are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
IBP installs insulation and other building products for residential and commercial construction across the continental United States. Residential construction represented 89% of revenue and commercial construction 11%. The company reported one operating and reportable segment and operated in more than 120 locations, according to management.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $159.7 | $126.3 | $289.6 | $232.3 |
| Gross profit / margin | $46.3 / 29.0% | $34.8 / 27.6% | $80.4 / 27.8% | $61.2 / 26.4% |
| Operating income / margin | $11.4 / 7.1% | $4.6 / 3.6% | $14.4 / 5.0% | $5.5 / 2.4% |
| Net income | $6.5 | $2.3 | $7.7 | $2.7 |
| Diluted earnings per share | $0.21 | $0.07 | $0.25 | $(0.61) |
Q2 revenue rose 26.4% year over year; first-half revenue increased 24.7%. Management attributed Q2 revenue growth to $20.7 million from acquisitions and $7.6 million primarily from organic job-volume growth. First-half increases included $30.0 million from acquisitions and $14.7 million primarily from organic volume. Gross margins improved in both comparisons, which management attributed mainly to operating leverage and cost efficiencies.
First-half 2014 common-stockholder results included $19.9 million of preferred-stock accretion charges; this explains the reported loss per share despite positive net income in that period. Q2 2015 effective tax rate was 36.4%; the first-half rate was 38.0%.
Cash flow, debt and liquidity
- First-half operating cash flow was $15.4 million, versus $7.6 million a year earlier. Accounts receivable growth used $9.9 million of cash.
- Investing cash outflow was $55.6 million, including $44.0 million of acquisition payments net of cash acquired and $11.5 million of property and equipment purchases. Financing provided $35.0 million. Cash declined $5.2 million to $5.6 million.
- At June 30, long-term debt, including current maturities, was $77.7 million; capital lease obligations totaled $24.0 million. The company had no revolver balance. Its amended credit facility provides $100 million of revolving capacity, a $50 million term loan, a $50 million delayed-draw term loan and a $25 million uncommitted accordion. Management said cash, operating cash flow and available borrowing capacity should cover expected needs for at least 12 months.
- The amended facility matures April 30, 2020 and includes leverage and fixed-charge coverage covenants. IBP reported compliance with all covenants at quarter-end.
Material changes, outlook and risks
- IBP completed three acquisitions in the first half—BDI Insulation, C.Q. Insulation and Layman Brothers—with stated total purchase price of $53.1 million, including $8.4 million in seller obligations. Purchase-price allocations were preliminary. On July 1, the company acquired EcoLogic Energy Solutions for approximately $3.6 million, subject to a working-capital adjustment.
- Capital expenditures increased to $11.5 million from $1.5 million in the first half of 2014, primarily to expand the vehicle fleet. The company repurchased 315,000 shares from a related party for $6.1 million, or $19.23 per share.
- Management described the business as positioned to grow with housing recovery and continued acquisitions, but provided no quantified revenue or earnings guidance. It cautioned that weaker economic conditions, housing demand or affordability, higher interest rates, and tighter mortgage lending could hurt results.
- Other stated risks include seasonality and severe weather, competition, supplier availability and product costs, acquisition integration, labor availability and costs, insurance and litigation claims, regulatory compliance, and IT and internal-control risks. Management said pending litigation was not expected to have a material adverse effect. No material change in risk factors or market-risk exposure was reported.
- Contractual obligations included $84.8 million of long-term debt payments, $26.5 million of capital lease payments, $19.9 million of operating lease payments and $86.8 million of estimated purchase obligations. The two supply contracts have quantity commitments whose actual dollar obligations are not specified in the contracts.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable organically, apart from acquisitions and changes in job mix or pricing.
- Whether acquisitions meet expected returns after integration costs, and how final purchase accounting affects goodwill, intangible amortization and acquired liabilities.
- Working-capital trends, particularly receivables, and the level of ongoing fleet and other capital spending relative to operating cash generation.
- Debt usage, interest costs, covenant headroom and liquidity needs as acquisition activity continues.
- The ultimate cost and timing of insurance claims, contingencies, supply commitments and the EcoLogic acquisition.